Brazil’s new anti-corruption law: Strict liability demands an effective compliance programme

September 10, 2014

Brazil’s history of corruption and bribery is well known. Given the general perception that corrupt behaviour exists at all levels of government, and the fact that some interaction with government officials is necessary across all industry sectors, companies doing business in Brazil need to be on their guard.

In response to major public protests calling for increased government transparency, the Brazilian Government enacted the Clean Companies Act (CCA). Coming into force on 29 January, the CCA targets companies operating in Brazil that are involved in bribery and corruption.

It is hoped that enactment of the CCA will encourage a culture of compliance within businesses in Brazil, and will prove to be a major step towards changing corrupt business practices.

This article explores the key distinctions between the CCA and other major international corruption laws, any potential problems with the CCA, and the potential impact of the statute on companies’ compliance programmes.

Comparison with other laws

A company operating in Brazil may have a compliance programme that is up to date with the United States Foreign Corrupt Practices Act (FCPA) and the United Kingdom Bribery Act. As such, it may assume that its programme is sufficient to avoid or minimise any charges under the CCA. This is a naive way to approach compliance.

The CCA differs from both the FCPA and the Bribery Act, and all relevant laws need to be examined to see if changes need to be made. While at this stage it is hard to predict just how the Brazilian authorities will apply and interpret the new law, compliance officers need to be aware of which companies the CCA applies to, what actions constitute a breach, and what sanctions may be enforced.

For example, the CCA applies to all Brazilian companies, regardless of whether they are incorporated or not. Similarly, all foreign entities with a temporary or permanent registered office, branch or affiliate in Brazil are subject to the CCA.

In contrast to the FCPA and the Bribery Act, the CCA covers the bribing of both Brazilian public officials and foreign public officials. But, unlike the Bribery Act, it does not cover commercial bribery.

The CCA can only impose administrative and civil penalties in cases of infringement, and not criminal sanctions as with the FCPA and Bribery Act. These penalties can be very significant and can include fines of up to 20 percent of a company’s gross billings for the previous year or, where gross turnover cannot be calculated, up to R$60 million (approximately US$27 million). They can also include debarment of the company from participating in future public procedures as well as dissolution of the entity.

Compliance officers need to be aware that the CCA contains almost none of the exceptions or affirmative defences covered by the FCPA and Bribery Act. For example, it contains no exception for facilitation payments and there are no affirmative defences for payments that are either permissible under written local law or bona fide business expenses. Companies also need to be aware that CCA prosecutions could lead to other industry-related regulators filing their own charges based on other Brazilian criminal laws.

On a more positive note, the CCA does narrow the scope of potential breaches by omitting to enact any accounting provisions. This is different to the FCPA, which requires companies to keep accounts and records accurate. Concealing payments or failing to record transactions, such as a bribe payment, 'are liable offences under the FCPA, but are not under the CCA'.

Another interesting component of the CCA is that leniency agreements will be offered in certain circumstances. Voluntary disclosure of a breach could reduce the resulting fine by up to two-thirds. Integrity mechanisms, audit procedures and internal reporting will also be taken into account when determining what sanctions a company may face, regardless of whether self-disclosure occurs. This means that a comprehensive anti-bribery and corruption compliance policy will be a mitigating factor when applying sanctions, and could help reduce any resulting fine.

The most significant feature of the CCA that compliance officers need to be aware of is the fact that it is a strict liability statute. This means that prosecutors do not need to show that a company acted with criminal or corrupt intent; they just need to prove that the illegal act took place. In terms of liability, a good compliance programme will be insufficient. Compliance officers need to ensure that their compliance programme is truly effective rather than simply focusing on policy content.

Potential issues

When enacting the CCA late last year, Brazilian President Dilma Rousseff used her line-item veto power to delete three clauses of the proposed bill. This made the resulting Act much stricter. Firstly, President Rousseff removed an article that limited the fines that could be imposed to the value of the contract obtained by the bribe. Secondly, a clause that contained an intent or fault requirement for certain penalties was removed. And, thirdly, the last article to be removed provided for more leniency on companies depending on the level of government wrongdoing during the course of the illegal act.

Although there has been some speculation that President Rousseff’s changes were a political manoeuvre to deflect attention away from government scandals and public protests before the forthcoming general election in October, it is unlikely that any major changes will be made to the CCA – even in the event of a change in government.

As with any new legislation, there are certain to be teething problems as local authorities start to apply and interpret the CCA’s provisions. The CCA was drafted and passed quickly in response to public pressure, and Brazil is only just beginning to tackle major anti-corruption issues. It is therefore only possible to speculate on the nature of any potential issues as well as how Brazilian enforcement agents will respond to the CCA.

One potential concern with the CCA is how consistently the law will be applied and enforced. The Act provides for enforcement by Brazil’s Comptroller General, but it also states that ‘the highest authority of the relevant Agency or entity of the Executive, Legislative and Judiciary Branches’ may enforce the statute. This means officials in all three branches of government (federal, state and local) may be able to enforce complementary laws and regulations under the CCA – even those with no corruption expertise or experience. Each of these enforcement agencies may apply and interpret the law differently, resulting in incoherent and conflicting precedents. This uncertainty is emphasised by the fact that each Brazilian state can write its own regulations on the CCA. Multiple enforcement authorities have however proven to be effective in other parts of the world. For example, China uses multiple agencies to enforce its corruption laws and the method is becoming especially effective, with different agencies sharing information in order to aid investigations. It remains to be seen how Brazil’s multiple enforcement agencies will perform once they start to investigate and prosecute under the CCA.

If a company discovers that it has breached the CCA it will have to decide if it is going to self-disclose in order to receive the benefits of a leniency agreement and potential fine reduction. As there is no duty to self-disclose, before self-disclosing a company will need to consider that:

  • it will need to admit wrongdoing in order to secure a leniency agreement
  • it could expose itself to other local and international legal procedures
  • if it has offices in multiple Brazilian states, different local agencies may start their own investigation.

Companies also need to be aware of the effect of global investigations if they choose to self-disclose illegal conduct. For example, Brazil and the United States have entered into a mutual legal assistance treaty under which the two countries can gather and exchange information, meaning that self-disclosure in Brazil may lead to an FCPA investigation in the United States.

This type of information sharing has already taken place between Brazil and the United States in the case of Brazilian aircraft manufacturer Embraer SA. In 2013, Brazilian authorities started to investigate Embraer for bribery allegations in the Dominican Republic after they requested information from the United States, which has been investigating the company since 2011 for FCPA violations.

Despite the fact that self-disclosure may expose a company to other investigations, the reduction in penalties under the CCA is hard to ignore.

What this means for compliance officers

The CCA will dramatically change the duties of a compliance officer in terms of legal responsibilities. Because this is a strict liability statute, compliance programmes will become the subject of a large number of judicial liabilities and, if a company is prosecuted, they will become evidence in a court proceeding.

There is also the pressure that, if prosecuted, a compliance programme can be a mitigating factor to reduce sanctions. The more effective and comprehensive a programme is, the more likely a fine or penalty will be reduced. Strict liability places a burden on companies operating in Brazil to make sure they have a compliance programme that is truly working at all levels to actively prevent bribery from occurring. Unlike in the United States, a thorough compliance programme will not have the possibility of making a company exempt from liability, as seen in the Morgan Stanley FCPA declination.

Due to the severity of potential sanctions within the CCA, companies operating in Brazil or thinking of starting business in Brazil need to examine their current compliance policies. A compliance culture needs to be embedded in a company in order to effectively and comprehensively prevent, identify and respond to corruption and bribery issues.

Third-party due diligence will be especially important when assessing compliance risks in Brazil due the unique way in which business is conducted in the country. For example, big businesses in South America are often family-owned, resulting in companies that lack many internal controls and often hinder or ignore due diligence requests even if they have nothing to hide.

Another common occurrence in Brazil is petty corruption and bribe-taking in order to supplement incomes. This is especially prevalent amongst police officers and customs officials, who are not paid as highly as government officials. Compliance officers need to ensure that their compliance policy addresses common local problems such as petty bribes or delays at customs. Given the inevitability of interacting with a government official when conducting business in Brazil, the burden is on a company’s compliance policies to ensure that employees know how to detect and avoid any wrongful acts under the CCA.

The Brazilian Federal Executive Branch is due to publish a set of guidelines to accompany the CCA in order to provide companies an idea of how the government will apply the law. It is expected that these guidelines will cover what constitutes a good compliance programme and how agencies will evaluate compliance programmes as a mitigating factor when applying sanctions.

 

The CCA has introduced serious new considerations for businesses operating in Brazil, and it is hoped that this statute may be the beginning of a new anti-corruption era for a country renowned for corruption issues. The strict statute will require companies in Brazil to implement thorough and effective compliance programmes that are developed to detect and prevent local risks. In the meantime, the government’s forthcoming guidelines and the first investigations should say much about just how committed Brazil is to its new anti-corruption and bribery law.

 

 

Previous Article
An examination of codes of conduct from some of Brazil’s largest companies
An examination of codes of conduct from some of Brazil’s largest companies

Companies have changed the way they do business in Brazil. In the following article, Compliance Insider® ex...

Next Article
Approval passed on Brazil anti-bribery law
Approval passed on Brazil anti-bribery law

A review on the content of the law suggests that it is aimed at controlling the participation and grant of ...